Investors appear uncertain about Moody’s
OMAHA, Neb. — The mounting regulatory pressure on Moody’s Investors Service and the other major credit rating agencies appears to be making investors nervous.
Regulators and lawmakers have proposed new regulations to reduce conflicts of interest and improve transparency in the $5 billion-a-year industry because of its role in the subprime mortgage mess, and Congress plans to hold hearings on Wednesday.
But Moody’s faces additional scrutiny because one of its former analysts has accused the company of pressuring its analysts to inflate bond ratings, and its biggest shareholder, Warren Buffett’s Berkshire Hathaway, has unloaded nearly 9 million shares since July.
Over the past few weeks, Moody’s stock plummeted from a Sept. 16 high of $25.93 to $18.50 on Friday. The stock recovered some ground on Tuesday by gaining about 11 percent, to close at $20.81, but Moody’s has been declining since last September’s 52-week high of $34.64.
Edward Atorino, an analyst with The Benchmark Co., said he thinks short sellers have been concentrating more on Moody’s than the other credit ratings agencies, contributing to the stock’s volatility.
“They’re under just continued attack and it just doesn’t seem to be going away,” Atorino said.
On Monday, Atorino downgraded Moody’s and the parent company of Standard & Poor’s, McGraw-Hill Cos., to “Hold” from “Buy” because of the intensifying regulatory pressure. Those two firms and Fitch Ratings dominate the industry.
Moody’s officials declined to comment on the eve of Wednesday’s Congressional hearings.
The rating agencies have been criticized for failing to identify risks in securities backed by subprime mortgages. They had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and write-downs at big banks and investment firms.
The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost, and which securities will be purchased by banks, mutual funds, state pension funds or local governments.
Atorino said the focus of the U.S. House Oversight Committee hearing on Wednesday will likely be the allegations that former Moody’s analyst Eric Kolchinsky has made about the company pressuring analysts to inflate bond ratings.
And a separate hearing will be held in the House Financial Services Subcommittee about proposed credit rating reforms that could change the way the rating agencies operate.
Earlier this month, the Securities and Exchange Commission proposed several new rules for the rating agencies. And several lawmakers have proposed stronger federal supervision of the industry.
Don Dion, president of Dion Money Management, said he thinks Moody’s and the other rating agencies are more trouble than they are worth for most investors right now because of the coming regulation and additional costs.
“I think the ratings agencies obviously have done a terrible job over the past few years, and there’s going to be tremendous pressure on them to do a better job. And that’s going to generate a lot of regulation and I think a lot of lawsuits,” said Dion, whose firm manages about $500 million from its Williamston, Mass., headquarters.
Dion said he expects Congress to ask the people who run Moody’s some hard questions during this week’s hearings, and he thinks Berkshire will continue selling off the stock.
Buffett’s Omaha-based company reported selling nearly 8 million Moody’s shares in July at prices between $26.59 and $28.73 on average. And earlier this month, the Omaha-based company reported selling another 794,388 Moody’s shares.
Many investors follow Buffett’s moves, so the sales prompted speculation about whether the legendary investor had lost faith in Moody’s. But at last report, Berkshire still held 39.2 million Moody’s shares, giving it control of 16.6 percent of the company.
Berkshire officials do not typically discuss stock transactions beyond what they are legally required to disclose, and Buffett did not respond to questions about the Moody’s sales. Moody’s, Standard & Poor’s, Fitch Ratings and other credit rating agencies all seemed to buy into the faulty notion that house prices would continue increasing indefinitely and based their ratings models on that.
“They made a major mistake in analyzing the instruments,” Buffett said in May. “But they made a mistake a great many people made.”
Not all the news is bad for the rating agencies.
Piper Jaffray analyst Peter Appert published two research notes this week making the case that the negative publicity about Moody’s and McGraw-Hill was being exaggerated.
He rated both the companies as “Overweight,” meaning he expects the companies to outperform most of their peers. But Appert also said preliminary figures for the amount of debt being issued in September suggest the rating agencies may have delivered a strong finish to their third quarter.
“While meaningful headline risk remains, absent life-threatening litigation losses, we believe the shares of both Moody’s and McGraw-Hill are oversold,” Appert wrote.
AP Business Writer Sara Lepro contributed to this report from New York.
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